Outlook for 2019: time for fiscal action is approaching

Frankfurt am Main, 14 February 2019 – The pace of economic growth has dropped off around the world. "The slowdown is affecting Germany in particular, with almost all the downside factors converging there," says Jens Wilhelm, the member of Union Investment’s Board of Managing Directors responsible for portfolio management and real estate. Although Wilhelm is not anticipating a recession, he does believe that action needs to be taken: "The time for fiscal intervention is approaching." His advice for investors in this environment is to take an active, selective approach.

Wilhelm has observed a significant drop-off in the pace of economic growth in recent months: "Both real-time data and our leading indicators point to heavily subdued economic activity." In Wilhelm’s view, the reasons for this range from sector-specific issues, such as the problems afflicting the automotive industry, to the effects of weather and the weakness of global trade. "Germany is particularly badly affected," says Wilhelm, citing the country’s extremely weak industrial output of late. He believes that fiscal intervention is needed to counter the downturn: "Now is the right time to bring together economic and structural policy in a meaningful way. With interest rates still very low, the state can remedy the obvious infrastructure deficits in Germany without having to overstretch financially while at the same time countering cyclical weakness."

Flattening out of global economic growth

Union Investment’s forecasts suggest that the Germany economy is likely to grow by 0.8 per cent in 2019, a sharp decline compared with the previous year’s rise of 1.5 per cent and the 2.5 per cent expansion recorded in 2017. Lower growth in gross domestic product (GDP) is also predicted for the eurozone. We expect GDP growth in the eurozone to slow to 1.1 per cent. That does not quite put us in recession territory, but it is still a severe economic setback," says Wilhelm. Growth is also likely to decline in other parts of the world, although not to the same extent. "In the US, the economy has a strong domestic focus," he says, highlighting the country as one that may be less badly affected by the slowdown. "So the weakness in global trade will have less of an impact there, particularly as there are still some final positive effects to come from Trump’s tax reforms." Wilhelm anticipates a moderate decline in GDP growth in the US, from 2.8 per cent (2018) to 2.4 per cent (2019).

Low inflation takes the pressure off monetary policy

According to Wilhelm, the combination of weaker economic data and a persistently low inflation rate is taking the pressure off the central banks to tighten monetary policy. In December, the US Federal Reserve (Fed) raised key interest rates for the fourth time in 2018. However, one thing is certain, says Wilhelm: "The Fed will not continue at this pace. They will instead switch off the autopilot and tailor their approach more to the underlying data." As a result, Wilhelm expects no more than two interest-rate hikes in 2019. "Nothing will happen in March," he predicts.

Wilhelm also expects the European Central Bank (ECB) to take a more cautious approach: "The ECB will look to continue normalising its monetary policy. However, the weakness of the economy and the political risks are standing in the way of this objective." Only as we approach the end of 2019 does Wilhelm expect the first steps to be taken, for example an increase in the deposit rate.

Fed’s ‘soft put’ is simultaneously supporting and restricting equities

Looking to the capital markets, Wilhelm sees limited potential across most asset classes: "Following the sharp sell-off at the end of 2018, the global stock markets rallied at the start of 2019; the environment remains challenging." In Wilhelm’s view, the continuing strength of corporate profits and the Fed’s change in tack with regard to monetary policy should provide support. "The Fed has signalled a ‘soft put’ with its new approach," he explains. "This will bolster the stock markets on the one hand, but limit their upside potential on the other." Should the economic picture improve dramatically, the central bank is likely to return to its original path of monetary tightening and thus withdrawing the stimulus from equities. As a result, Wilhelm believes that the global stock markets will trend sideways in the coming months.

Emerging markets look more promising again

Wilhelm also predicts little movement in the bond markets over the coming months. "The flatter interest rate path being taken by the Fed and the ECB will cap the upside potential of yields on Bunds and US Treasuries," he says, offering the prediction that ten-year German government bonds will be yielding 0.6 per cent at the end of the year compared with 2.8 per cent for equivalent US paper. On the other hand, Wilhelm believes that investments in the emerging markets have become more interesting again. Prospects have also improved somewhat in the higher-yielding bond segments.

Late cyclical environment shaping investment decisions

"We remain in a late cyclical environment with weak but at least positive growth," says Wilhelm, explaining the broader picture for 2019. Moreover, he continues to anticipate volatility in the capital markets, not least due to the political uncertainties surrounding Brexit, the US budget debate and the trade dispute. "The potential remains limited across most asset classes. Activity and selection will be trump cards in such an environment," is his conclusion.


As at: 14. February 2019